How to create a pre-authorized debit form in Canada

This article has been updated for new 2023 Rule H1 changes.

If you’re brand new to pre-authorized debit (PAD) processing, you might not be aware of how the authorization part works. No problem, we’ll walk you through everything you need to know. Here’s what you can expect in this article about PAD authorization forms (also known as PAD agreements):

1. The mandatory requirements of a PAD authorization form
2. The acceptable formats
3. Notification requirements
4. Three practical examples
5. BONUS: Free tool to make your own PAD form

Before we get into it, let’s make sure we’re on the same page. Because pre-authorized debits are called many different names, it’s important to remember that PAD processing in Canada is the same as direct debit, automatic withdrawals and pre-authorized payments.

A pre-authorized debit is a bank to bank transfer initiated by a payee (your business) when a payor (your customer) gives permission to do so.

 

If you’re new to pre-authorized debits and want to learn the basics, here’s a beginner’s guide to help you through.

Okay, now that we have taken care of the basics of PAD, let’s dig into what an authorization form is and why it’s an important part of the PAD process.

If you want to accept pre-authorized debits from your customers, you are legally required to receive authorization and document it. The entire point of a pre-authorized debit agreement is to make sure the payor (your customer) and the payee (your business) are on the same page. So when you withdraw money from their bank account, there are no surprises.

Payments Canada is the governing body that outlines and regulates the rules of pre-authorized debits in Canada. Rule H1 is a document that outlines every requirement. Because Rule H1 is a very long, technical guide, we’ve made a condensed list of requirements for pre-authorized debit authorization and the acceptable formats.

Mandatory requirements of a pre-authorized debit form

This is a what a PAD agreement form looks like, along with the required elements as outlined by Payments Canada:

 

 

 

If you follow along with the number guides, here’s an explanation of the eight requirements of a PAD form.

Contact details – So the payor can get in touch with you.

PAD category – Is the payor a person or a business?

Timing – This outlines to the payor when the payments are to be taken out (weekly, monthly, bi-monthly, annual, on set dates or otherwise.) You also need to explain if each payment is to be triggered by a specified act, event or other criteria. If it’s to be triggered by a specific act, it needs to be clear on what that is.

Amount – So the payor knows how much is being taken from their account. If it’s an authorization for variable amounts, it needs to be clearly stated.

Authorization statement – A clear statement that outlines authorization to withdraw funds from a particular account.

Recourse statement – So the payor understands their rights to reimbursement for unauthorized debits.

Cancelation details – So the payor knows how to cancel the agreement.

Date of agreement & signature (if a physical paper form).

Payment Service Provider Statement – If you use a third party to process your payments (like Rotessa), you are required to notify your customers.

Acceptable pre-authorized debit agreement formats

In-person, pen & paper PAD forms

The most common type of authorization is a paper form, completed by the payor in person. The payor typically provides a void cheque (but not required) along with the completed agreement to provide their account details. This format is simple to process and verify. For paper agreements, it’s a good idea to keep them on file for at least one year from the final date of the agreement.

Online PAD forms

Another acceptable format is electronic, but there are some additional requirements to consider when you receive authorizations online.

Most importantly, you are responsible to verify the identity of the payor with an online form.

ID Verification

When you receive a PAD agreement from your customer, it is your responsibility to ensure you have commercially reasonable means to identify who they are. This primarily applies when you receive your authorizations online.

Here are three ways to verify the identity of your payor if you accept PADs online.

1. Established Email Address
   If you already do business with a customer, you’ve likely communicated with that person via email. You can send an electronic PAD form directly to the payor’s email address and confidently link the ID of the email to the payor. This would establish reasonable means of identifying the customer.
2. Microdeposits
   When a payor completes an authorization online, many PAD processors provide a way for the payee to send a micro deposit (a couple of cents credit) into the payor’s bank account without telling the payor the amount of the deposit. When the payor identifies the correct amount of the deposit back to the payee, it can be determined that the payor is, in fact, the owner of the authorized bank account.
3. Online Banking Verification
   The most recent trend is to verify ID through online banking credentials. In this method, a payor enters their online banking credentials through a third-party technology set up by the payee’s PAD processor. Credentials are securely passed to the financial institution and account details are pulled, verifying the bank account.

Pre-authorized debit form notification requirements

Payments Canada is very specific about the lead time required for you to notify your customers when the payments are coming out (remember; the point of PAD authorization is to have no payment surprises).  Notification requirements depend on the type of agreement you have in place. Or, if specified, the payor and payee can mutually agree to waive or shorten the notification period.

For variable amounts

With variable amounts, you must give notice of the amount at least ten days notice before the payment is processed (unless both parties mutually agree to waive this period). You must also give notice if the payor asks you to change the amount.

For fixed amounts

You are required to give at least ten days’ notice before the first recurring withdrawal, which outlines the amount and payment schedule. No further notifications are required, assuming the amounts are never larger than the agreed-upon amount.

If included in the PAD agreement, the payor and payee can mutually agree to waive or shorten the notification period.

Okay, we’re through the technical details! Let’s move on to some real PAD form examples.

Payor-defined pre-authorized debit form

Industry Examples: Non-profit organizations or churches for donations.

Key Difference: In a payor-defined PAD form, the payor outlines the specific amount and timing of the payments.

Fixed Pre-authorized Debit Form

Industry Examples: Fitness centers, daycares, clubs and leagues for membership fees.

Key Difference: The payee outlines a specific fixed amount and timing schedule of the payments

Variable Pre-authorized Debit Form

Industry Examples: Utility company for usage or accountant, law office or marketing agency.

Key Difference: The payor agrees to allow the payee to debit their account on the schedule agreed to or based on the events outlined in the agreement.

Congrats! You now have all the tools and information to go out and build your own PAD Form!

There are no rules on how you must build a PAD form it or how it should look. As long as you have the necessary requirements, you can make it on your own. That being said…

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We’ve built an online tool that makes it really easy to build your own pre-authorized debit forms. The PAD form generator lets you customize a PAD form with your logo, text and fields you want to include.

Create Your Own PAD Form